Yum! Brands Up Nearly 15% In 2016, CLSA Remains Cautious On Outlook

Shares of Yum! Brands YUM had a strong start this year during Q1 but since April shares have struggled to breakout. CLSA's Jeremy Scott feels the lack of upside conviction during Q2 is primary due to brand fatigue and category exhaustion as the Chinese fast food market remains over-extended. Scott believes structural pressure, increased competitive intensity and macro headwinds have escalated in recent months and because of these factors he lowered estimates for FY 2016 from $3.67 to $3.61 and FY 2017 EPS from $3.84 to $3.82.
Scott says fast trends have weakened in the past six months and says data shows Chinese citizens are not eating more fast food this year compared to last year.
To wit:
"The latest study by China Reality Research (CRR), which spoke with 660 urban families, including 400 in tier 1-2 cities and 260 in tier 3-5 cities throughout May 2016, indicates that foreign fast-food trends (which include Pizza Hut) have noticeably weakened over the past six months, signaling a continued slowdown in comps. According to CRR, in tier 1-2 cities, the percentage of respondents saying they “consume more foreign fast food than a year ago” has dropped significantly to 9% in May-16 from 17% in Oct-15 and 12% last year in May-15 (Fig 1). It is also lower than the level observed immediately following the OSI poultry supplier food-safety incident in Oct-14 at 12%."

Scott reiterates Underperform on Yum and keeps his $82 PT.